Inflation is Eroding Your Savings…Faster Than You Think

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Posted by The Savvy Retiree on March 10, 2016 in Money Saving Strategies, Personal Finances

“Inflation is when you pay fifteen dollars for the ten-dollar haircut you
used to get for five dollars when you had hair.”
Sam Ewing

We checked the list. We checked it twice.

Nope. And still nope.

Nowhere on the 2016 Forbes Richest Billionaires List could your editor find his name. Alas…

Yes, The Savvy Retiree Daily is a free publication (and we mean for it to be worth every penny!)…but we’re also a young publication, full of naïve hope and cheery aspiration.

We’ll have to wait until next year’s Forbes list to see how we’re getting on.

As for the current standings, we were (all) nudged out by, in order:

  1. Bill Gates (again at the top spot with an estimated $75 billion, though falling $5 billion since last year)
  2. Amancio Ortega (owner of clothing line Zara, net worth $67 billion)
  3. Warren Buffett (famed investor who managed third place despite slipping $11.9 billion down to “only” $60.8 billion)
  4. Carlos Slim Helú (Mexican telecom magnate and investor, worth $50 billion)
  5. Jeff Bezos (Amazon founder at $45.2 Billion)

Rounding out the top 10 were Mark Zuckerberg (Facebook, $44.6 billion), Larry Ellison (Oracle, $43.6 billion), Michael Bloomberg (Bloomberg Media, $40 billion), and the Koch Brothers, David and Charles (Koch Industries, $39.6 billion).

The list was notable for the country with the biggest number of new entries (China)…as much as for the country with the biggest number of dropouts (also China).

Seems there’s a lot of cash sloshing around in the Middle Kingdom…hither and thither.

But let’s take our head out of the ol’ cumulonimbus for a moment…and plant our feet back down on terra firma.

On Monday we began our little investigation into systemic collapse…the kind that typically impacts the non-billionaires among us. (Note: Even millionaires need to watch out!)

But what kind of “collapse” are we talking about?

The kind where nearly 50 million Americans come to rely on food stamps for their daily sustenance?

Or where every taxpayer in the land is on the hook for $160k worth of the National Debt?

Or how about where wages stagnate for an entire generation…then begin a long, inexorable decline?

Partly, yes. But there’s more to it than that. Much more…

As faithful The Savvy Retiree Daily readers already know, the above trends are already unfolding. Our job here is trying to connect these dots—and others—so that we can build and maintain true independence in the face of ongoing and perhaps even worsening collapse.

We need to think like the proverbial frog in the cauldron that says, “Hmm…it’s comfortable in here for now…maybe even relaxing…but if this water keeps heating up, I’m going to be in a spot of bother before too long! Best I hop out.”

Looking around the world, we can already sense the water beginning to bubble…

We’ll start with potential threats to the cash in your wallet…the balance in your account…the money stashed away for retirement.

The most persistent attack on you wealth—the one that eats away at it day in, day out…while you work and while you sleep—is inflation. Usually, the effect is considered slow but constant. Until, of course, it’s not…

For the 12 months ending in January, the U.S. government claims official inflation of just 1.4%. That means, for every $100 note you have, the government says it “only” clipped a buck forty from your savings last year.

Of course, like suspected terrorists and presidential candidates, the figures are apt to lie under pressure. Every ten years or so, the methodology the government uses to compute the inflation rate changes.

This “moving target” not only makes it hard to gauge what the real impact of inflation is to your wealth in the here-and-now…but also tough to compare one period to another.

A skeptic might even be tempted to say the misinformation is made purposely difficult to interpret…a way to keep ordinary folk in the dark while they are robbed blind by those that “serve” them.

There are some “old school” economists—like John Williams from shadowstats.com—who attempt to compute the rate using older methodologies.

Their calculations may or may not hit closer to the mark…

For example, using the methodology employed by the government in 1990, Mr. Williams figures today’s inflation probably runs closer to 5%. (That is to say, the government helped itself to one Abraham Lincoln out of every Benjamin Franklin you had in your wallet last year.)

Using the 1980-based methodology, Williams reckons today’s rate likely tips 9%. (Your $100 bill buys $9 less than it did this time last year.)

In any case, it mightn’t seem like much. A couple of bucks here. Five bucks there. What’s a few percentage points in the grand scheme of things?

Unfortunately, what most people don’t register is the slow creep of compound inflation. That is, the cumulative effect of inflation eating away at your savings over time is worse than seems immediately apparent.

The math is boring, yes…but the outcome is important.

Say you have $100k set aside for “later.”

Assuming a 3% annual inflation rate for the next 20 years (about the official average over the last century or so), the effective purchasing power of that money in 2036 will be…$55,367.58.

Put another way, in order to buy the equivalent of $100,000 worth of goods and services two decades from now (at 3% annual inflation) you would need $180,611.12.

(Here’s a helpful inflation calculator in case you want to play around with the inputs—starting amount, inflation rate, period, etc.)

Of course, we’re only talking about the effect of “everyday” inflation. The “benign” kind the government willingly owns up to.

What about when things get out of hand…when the growth turns malignant…and inflation ramps up to double…or triple digits…and beyond?

Here in Argentina, the average man on the street knows inflation runs at around 30-35%. The previous government (ousted last year) used to claim it was “only” 10%…then threatened to jail anybody who said otherwise (No joke!)

Even so, for the 70 years between the end of WWII and the demise of the Kirchner reign in 2015, inflation here on the pampas averaged over 200%. The all time high came in 1990…20,262%.

Try plugging those figures into your calculator!

Of course, when the supply (and therefore value) of anything is left to crooks and thieves, it stands to reason they’ll loot it for all it’s worth.

Drug pushers cut their products…dodgy bartenders water down their booze…and governments print away the value of their (our) hard-earned cash.

But it doesn’t have to be that way. Far from it…

When we return, a look at the disappearance of cash…and the market-based alternatives you can use to protect yourself.

Image ©iStock.com/chairboy

T&P Tool Shed

Buy More, Pay Less

By the staff of T&P

Keeping your head above the rising tide of inflation may be a daunting task, but there are a number of simple ways to offset the ever-increasing costs—not the least of which is bulk purchasing. Big Corporate can hike their prices all they want, but the toilet-paper mountain in your garage will never cost you a penny more. Below are some of the best items to buy in bulk and some bulk-buy pitfalls to avoid.

Toothpaste: When bulk buying there is a tendency to impulse buy cases of “great stuff” we simply have no room to store. You’ll always need toothpaste and it doesn’t take up much room.

Dry rice, pasta, and beans: If food is already in the house you’re more likely to eat and cook with it. Stock up on these dried goods, each a perfect foundation for a healthy meal, and buy the cookies and chocolate as once-off treats.

Dishwasher and laundry detergent: With some products you’ll find yourself using more simply because you have it, which is a waste in its own right. Detergent is used in carefully measured increments meaning you won’t overuse it.

Soap and shampoo: Soap and shampoo will last forever but there is a tendency to overuse when bought in large bottles. Keep some smaller bottles around and refill from the larger bottles when needed.

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